The management of Arnold Corporation is considering the purchase of a new machin

Question

The management of Arnold Corporation is considering the purchase of a new machine costing $200,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

Year Income from Operations Net Cash Flow
1 $50,000 $90,000
2 20,000 60,000
3 10,000 50,000
4 5,000 45,000
5 5,000 45,000
The cash payback period for this investment is:


a. 5 years

b. 4 years

c. 2 years

d. 3 years

Explanation / Answer

Year Cash Flow Remaining Balance
0 -200,000 -200,000
1 90,000 -110,000
2 60,000 -50,000
3 50,000 0
4 45,000 45,000
5 45,000 90,000

Cash back period is when the "Remaining Balance" is zero.

d. 3 years..................(answer)

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